McKesson Beats on EPS; Ups Outlook - Analyst Blog

McKesson Corp.'s (MCK) third quarter fiscal 2011 earnings of $1.22 per share (excluding special items) beat the Zacks Consensus Estimate by 11 cents and the year-ago earnings by 3 cents. Including expenses associated with the acquisition of US Oncology, earnings for the quarter came in at $1.12 per share.

Lower share count boosted third quarter earnings.

Revenues for the third quarter of fiscal 2011 remained flat at $28.2 billion and were slightly short of the Zacks Consensus Revenue Estimate of $28.4 billion.

Quarter in Detail

McKesson operates through two segments: Distribution Solutions and Technology Solutions. Revenues at the Distribution Solutions segment remained flat at $27.5 billion in the reported quarter.

Revenues from the US pharmaceutical distribution business slid 1% to $24.1 billion. The decline was primarily due to reduced revenues from two of the company's customers and the prior-year impact of the H1N1 flu virus. Sales of generics through McKesson's proprietary program, OneStop, continued to climb, with the current quarter experiencing a 29% increase. Canadian revenues grew 6% to $2.6 billion, basically reflecting market growth. Medical-Surgical distribution revenues declined 2% to $744 million.

Revenues at the Technology Solutions segment went up 2% to $790 million during the quarter. McKesson recorded $23 million worth of revenues during the current quarter, the expenses of which were recognized earlier. Revenues from this segment are derived from services, sale of software & software systems and hardware.

Within the Technology Solutions segment, service revenues increased 3% to $629 million. While software revenues slipped 2% to $135 million, hardware revenues shot up 13% to $26 million in the third quarter of fiscal 2011.

Gross profit for the quarter remained flat at $1.46 billion. McKesson reported a 2% increase in operating expenses, incurring $965 million.

Outlook Raised

McKesson revised its earnings guidance range for fiscal 2011. The company now expects earnings (excluding special items) in the range of $4.82 to $5.02 per share, up from the previous guidance range of $4.72 to $4.92 per share.

The fiscal 2011 Zacks Consensus Earnings Estimate of $4.85 lies within the company's guidance range.

With a few blockbuster drugs expected to lose US patent exclusivity in 2011, especially Pfizer Inc.'s (PFE) Lipitor, the company expects to record higher generic revenues.

McKesson also expects a winding down in operating expense growth during the fourth quarter of fiscal 2011.

For fiscal 2011, the company expects cash flow from operating activities to range from $1.5 billion to $2.0 billion.

Neutral on McKesson

We currently have a Neutral recommendation on McKesson, which is supported by a Zacks #3 Rank (short-term Hold rating). McKesson is a major player in the pharmaceutical and medical supplies distribution market, and we believe that several factors like an aging population, increased use of generics, and growing demand for specialty pharmaceutical products, especially oncology drugs, should help drive growth in the Distribution Solutions segment in 2011. However, with the swine flu pandemic turning out to be less severe than expected, we believe the company will need to pursue business opportunities to help sustain growth in 2011.

 
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